London has been ranked as one of the world’s cities most at risk of a housing bubble.
A report by UBS, which measures the world’s most overpriced property markets, said bubble risk appears greatest in Hong Kong, followed by Munich, Toronto, Vancouver, London and Amsterdam.
UBS said people wanting to get onto the property ladder in London would have to work 15 years to afford a 60 square metre flat.
The UK capital came second only to Hong Kong in a price-to-income comparison. People in Hong Kong would need to work for 22 years to afford a 60 sq m flat, up from 12 years a decade ago, UBS said.
Although bubble risk has soared, UBS said there is no evidence of simultaneous excesses in lending and construction, which is in contrast to the boom of the mid-2000s. Outstanding mortgage volumes are growing half as fast as in the run-up to the financial crisis.
“Although many financial centres remain at risk of a housing bubble, we should not compare today’s situation with pre-crisis conditions,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Nevertheless, investors should remain selective within housing markets in bubble risk territory such as Hong Kong, Toronto and London.”
The median total return on housing in the most important developed market financial centres was 10% annually over the past five years.
“How appealing returns will be in the next few years is questionable. We recommend caution when buying residential real estate in most of the biggest developed market cities,” said Claudio Saputelli, head of real estate at UBS Global Wealth Management’s Chief Investment Office.
In the past year, the house price boom in key cities lost intensity and scope. Inflation-adjusted city prices increased by 3.5% on average over the last four quarters, considerably less than in previous years but still above the 10-year average.
And the first cracks in the boom’s foundation have begun appearing: house prices declined in half of last year’s bubble risk cities – in London, Stockholm and Sydney by more than 5% in real terms.